As initial coin offerings have raised $3.5 billion this year, they’ve been getting the attention of regulators.
Earlier in November, the Securities and Exchange Commission chairman Jay Clayton said that he hadn’t seen one that didn’t look like a security.
It seemed to be a shift in tone from the SEC’s conservative, measured July report on DAO tokens.
So on Thursday, the audience at the ICO Financing Conference: How To Raise Money The Right Way, put on by Blockchain at Berkeley, eagerly awaited the talk by four SEC officials. However, many were disappointed that not only did the officials not have news, but also that they focused on how to use existing regulations to hold compliant token sales and sidestepped nearly every question about the technology not covered by already existing regulations.
“People mentioned there was an elephant in the room that wasn’t addressed — you’re trying to fit a new technology into existing regulations … instead of changing regulations to fit with the new technology,” said organizer Ronen Kirsh.
After going into detail on how crypto entrepreneurs could take advantage of crowdfunding rules and other regulations to hold their token sales, they held a Q&A, during which the officials repeatedly deflected questions with answers such as, “All these things are being digested internally, there’s no formal guidance on any of this,” “These are good questions,” and “One of our missions is to facilitate capital formation…. I don’t have a good answer for you but a lot of people are working on these issues internally.”
The requests from entrepreneurs for guidance on how securities law would apply to the technology across various scenarios and the lack of clarity from regulators underscored just how quickly the technology could outpace, or is already outpacing, existing regulations.
Upon being asked one question about how they’d regulate decentralized exchanges — a tricky proposition given that there is no entity against which to take enforcement action even if the exchange were to trade unregistered securities — the four officials looked stumped. After a beat, the audience broke out into laughter.
The SEC representatives were Zachary Fallon, special counsel in the office of small business policy; Victor Hong, senior counsel in the division of enforcement; Scott Walker, attorney-advisor in the Office of Compliance, Inspections and Exterminations; and an unnamed woman (different from the one listed on the program). They did, however, answer one big question many had wondered — whether tokens could automatically be deemed securities simply by virtue of whether or not they were listed on an exchange. The answer: no.
The entrepreneurs in the audience also pushed back on applying existing regulation to token sales. For instance, during the Q&A, Kurt Kumar of the Block-Con conference, suggested that the SEC offer a two-year moratorium to token issuers to experiment. “If you have an 18-year-old who can fight a war, let him buy a token,” he said. He added, to audience laughter, “If you put your life savings into it, then you should be getting burned.”
The tension that the SEC is navigating — trying to protection investors while not stifling innovation — is the same one that sparked several debates amongst speakers at other sessions.
Decrying a system that makes it possible for wealthy investors to get in and out early and leave poorer investors holding the bag, Matthew Liston, founder of Augur and chief strategy officer for Gnosis, said in a panel on ICO structures, “If you participate early, you get some discount. This is really unhealthy for the ecosystem. We shouldn’t be giving advantages to larger crypto holders … Basically VCs are bringing the Silicon Valley Ponzi scheme to tokens.”
Jeremy Gardner, founder and managing partner of Ausum Ventures, pushed back, asserting the amount of risk the VCs take on is appropriate for them, but not for consumers. “Consumers shouldn’t be investing in white papers,” he said, referring to the risk involved in investing in extremely early-stage ideas. He also noted that cautious practices like treating sales of future, pre-network tokens as securities via agreements called SAFTs (simple agreement for future tokens) “keeps consumers from being bamboozled.” (When asked directly about SAFTs, Fallon referred the audience to the SECc’s report on a sister agreement called a SAFE.)
Panelist Vinny Lingham, chief executive officer of blockchain identity startup Civic, suggested lock-up periods for such investors so they can’t immediately dump coins but are incentivized to help ensure the token succeeds. Potentially, that as well as other solutions for aligning incentives could be programmed into the tokens themselves. But that isn’t yet a common practice.
In a sign of the times, during the conference Ethereum venture studio ConsenSys announced it was pausing all its token sales while it undertook an initiative to address community and regulator concerns around these events.
“I think [the SEC officials] were very careful to let people know they were just collecting information, which is the smart thing to do — to make sure they understand the space,” said attendee Jor Law of Homerier Law.
It looks like those entrepreneurs looking for more clarity will have to wait longer.